Obama's SEC Pick Is No Joe Kennedy

W hen Franklin Roosevelt was looking for someone to head the new agency created to prevent the kind of corrupt Wall Street practices that had brought the stock market and the economy to their knees, he didn't turn to a pinstriped banker or a fancy-pants lawyer or even a hard-bitten prosecutor. He tapped Joseph P. Kennedy, a politically ambitious bootlegger and dealmaker who knew exactly how to play the game, circumvent rules, rig markets and get the better of his customers. The best way to catch pirates, Roosevelt figured, was to hire another pirate.

Unfortunately, this is one page from the New Deal playbook that Barack Obama has decided not to copy. His nomination of Mary Schapiro to be chairman of the Securities and Exchange Commission is as safe and predictable as it is disappointing. What it means is that we will have lost the best opportunity yet to root out the deeply embedded cynicism and corruption that have spawned one scandal after another on Wall Street over the past 20 years.

For the top SEC job, Obama needed to mount a determined search outside the current establishment -- someone willing to take no prisoners and question everything about the way the industry does business and the way the government regulates it, someone so capable of channeling the outrage the country now feels that he or she would have industry insiders quaking in their hand-made wingtips. Instead, what we got was someone who not only has been at the very center of a failed regulatory process for the past two decades, but has emerged from it well-liked and acceptable to everyone.

Schapiro would have been the perfect appointment at almost any other time. She is a former SEC commissioner and chairman of the Commodity Futures Trading Commission who left government to head up the securities industry's self-regulatory body, now known as FINRA. She's smart, responsible, honest and hard-working, by all accounts a skillful manager well-suited by temperament and experience to revive a badly demoralized agency. She is admired and respected by those she has worked for and worked with. She knows the industry and the regulatory apparatus as well as anyone in the country and has the added advantage of having a good political ear.

Schapiro is also a reformer who is deeply committed to protecting investors and the public, willing to stand up to the industry on selected issues. At the SEC, she favored modest steps to allow shareholders a greater voice in appointing directors and to rein in runaway executive pay and called for greater oversight over rating agencies. At the CFTC, she voiced an early warning about the dangers of unregulated derivatives trades and took steps to subject them to modest amounts of government supervision. At FINRA, she overcame strong industry opposition to make disciplinary records available to the public and mounted enforcement campaigns against firms engaged in deceptive practices in the sale of mutual funds, annuities and college savings plans.

Not insignificantly, she is a working mom who has succeeded with and in a testosterone-driven industry with too-few female leaders.

What I didn't know until I read through some of her speeches this week is that Schapiro also gets the fundamental problem with Wall Street's scummy culture. She understands that it is a culture that rests on a barely disguised contempt for customers; that is dominated by short-term thinking; and that glorifies risk-taking, games-playing and corner-cutting. It is, as she put it in a speech last October at Dominican University, a culture in which "individuals have allowed the pursuit of wealth to become mere sport, devoid of any ethical meaning or moral obligation to others."

So what's the problem with Mary Schapiro as SEC chairman? The problem is that there is nothing in her record to suggest that she is likely to clean house at the agency and launch a brutal and sustained assault on Wall Street culture.

Remember the good old days when corporations would routinely manipulate earnings so that they came out just as the analysts expected? Or when analysts used to issue buy recommendations for stocks they knew were lousy just because it helped their firms win investment-banking business? Or when brokerage firms would routinely put clueless customers in mutual funds that offered high commissions, not the best results? Or when investment banks would put aside shares in the hottest IPOs for the personal accounts of corporate chief executives who steered underwriting business their way?

These practices weren't secrets -- to anyone even vaguely familiar with the industry, they were hidden in plain view. And yet for years, no regulator, including Schapiro, was willing to risk being demonized by the industry, criticized by Congress and overturned by the courts to do what was necessary to stop these practices. Indeed, in every case, it was only after investors had lost their money and some other regulator had begun a crusade that Schapiro finally showed up to close the proverbial barn door. Now the process is repeating itself as Schapiro and other regulators begin to clean up after underwriters who knowingly peddled securities of questionable value, ratings agencies that were hopelessly compromised, banks that set up giant off-balance-sheet vehicles to circumvent regulatory capital requirements and brokers who peddled auction-rate securities to investors who thought they were something else.

All that is necessary, of course, but clearly this time we need to do more. We need an SEC chairman who is willing to move beyond narrow enforcement actions and no-fault consent decrees to stage a series of regulatory show trials that will expose in graphic detail how people think and behave at all levels of Wall Street firms. We need a chairman who will use the commission's broad powers to fine and debar from the industry big-name directors, top executives, ratings agency officials and other gatekeepers whose nonfeasance resulted in significant losses for investors, customers and taxpayers. We need a chairman who will make effective use of the bully pulpit to expose other well-known industry practices that put the interests of Wall Street ahead of those of its customers. And we need an SEC chairman willing to protect the powers and independence of the SEC against the almost-certain encroachment of the Treasury and the Federal Reserve, whose records on investor protection are virtually unblemished by success.

Mary Schapiro is a wonderful person and a fine public servant who would certainly be a big improvement over the SEC's current, ineffectual chairman. However, given the depth of the current crisis and the virulence of Wall Street's culture, she is not the change we need.